Blockchain based payments can work with high confidence of integrity of data, without the need of an intermediary and also establishing a high degree of trust by providing tamper-proof data.
Just like all the finance entities, funds have legally binding relationships between the different participants and thus to ensure that operations and capital flux are efficient and accurate through a fund’s entire lifecycle, all participants have to each maintain a database system which are isolated, but each also rely heavily on every participant e.g. Fund administrator, Fund Manager, Auditor, Custodian, Lawyers etc. Hence by providing a single source of database or making it decentralised among all the participants and using smart contracts, the whole process will become much more efficient, transparent and liquid.
What is a Smart Contract?
A Smart Contract is a tiny program that lives on the Blockchain and does the same mundane repetitive tasks that a human performs, but smart contract does that much more quickly and without getting tired. Smart Contracts are a guarantee of a set number of things, simply being a logical (coded) promise that states X will happen, provided Y happens first and so on. Since Smart Contracts are deployed on Blockchain, this can set and apply rules without needing any third party.
Further read about smart contracts is posted here
How might a Blockchain based fund work?
Fulfilling the role of the participants in the traditional fund structure, GECKO is creating Smart Contracts that could be utilised instead of the need for a third party involved in the process, it promises not just efficiency but also saves a huge amount of costs involved in the process.
Subscriptions and Redemptions — Enforcing investor restriction and other fund process.
Calculating NAV — On a daily basis calculation of the Net Asset Value (NAV), unrealised profit and loss and fund expenses.
Data — All fund data, compliance and performance monitoring log maintained on the Blockchain.
What happens after the initial investment ?
After the fund subscription being made (shares been allocated to an investor) the smart contract will immediately deploy the fund units to a registered account only (at an approved exchange like BSDEX) with the fund manager having trading authority on this account and actively managing the portfolio.
How are the challenges handled?
As it goes without saying, the funds world is super slow and expensive. In typical hedge fund, a new subscription and redemption only takes place once a month and each of these operations cost somewhere between €40 k — 80 k.
In relation to the case above, GECKO’s smart funds solution being completely Blockchain based could provide high efficiency and cost effectiveness — where the whole process could be done daily and at the minimal cost of say few euros (x < 5€). Once all the processes are performed (e.g. calculating NAV, subscription/redemptions, AML/KYC) permanent record/transaction could be appended to the Blockchain.
Security and other operational issues ?
A smart contract that needs to remain operational for decade(s) requires a different design than basic one time-off smart contracts — GECKO embraces the following factors to help alleviate potential issues in the funds industry :
Security: By only exposing the essential functions to the investors, admin functions like NAV is only revocable by selected address.
Upgradability: Assigning the related logic to only sub contracts (part of parent contract) only which can be upgraded to follow latest version and fix any exploits or bugs.
Modularity: Data feeds and calculations performed heavily rely on third party sources, hence modular design help us focus on the part which are responsible for interaction and could be easily changed if required because of being flexible and more modular.
Compliance/ Governance: Digital Funds can build in core compliance and governance protocols to the smart contract, which can be executed by the fund manager, fund administrator or custodian — including AML/KYC, Investment Restriction, Due Diligence and Outsourcing.